Is Home Depot a Buy At All-Time Highs?

With shares of Home Depot (NYSE:HD) trading around $79, is HD an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Home Depot is a home improvement retailer that operates Home Depot stores, which are full-service, warehouse-style stores. The company sells an assortment of building materials, home improvement, lawn and garden products, and provides a number of services. Home Depot stores serve three primary customer groups: do-it-yourself customers, do-it-for-me customers, and professional customers. Construction and improvement of new and existing homes and businesses is on the rise as consumers and business owners are investing where they operate. Look for the home and business improvement trend to continue, and for Home Depot to be a leading provider of the products and services consumers and professionals demand.

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T = Technicals on the Stock Chart are Strong

Home Depot stock has been on an explosive run that has just about quadrupled its stock price over the last few years. The stock is now trading at all-time high prices and does not yet show any signs tired trend. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Home Depot is trading above its rising key averages which signal neutral to bullish price action in the near-term.

HD

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Home Depot options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Home Depot Options

20.74%

70%

71%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Home Depot’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Home Depot look like, and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

22.06%

35.80%

5%

17.44%

Revenue Growth (Y-O-Y)

7.4%

13.94%

4.64%

1.67%

Earnings Reaction

2.54%

5.69%

3.62%

3.57%

Home Depot has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have been very pleased with Home Depot’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

How has Home Depot stock done relative to its peers, Lowe’s (NYSE:LOW), Orchard Supply Hardware (NASDAQ:OSH), Lumber Liquidators (NYSE:LL), and sector?

Home Depot

Lowe’s

Orchard Supply Hardware

Lumber Liquidators

Sector

Year-to-Date Return

28.49%

20.66%

-75.17%

56.73%

20.43%

Home Depot has been a relative performance leader, year-to-date.

Conclusion

Home Depot is a home improvement retailer that is a leading provider of the products and services consumers and professionals are demanding. The stock has been on an explosive run over the last few years that has taken it to all-time high prices. Over the last four quarters, earnings and revenue numbers have increased which has led to a strong bid by investors. Relative to its strong peers and sector, Home Depot has been a year-to-date performance leader. Look for Home Depot to continue to OUTPERFORM.

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